Bank of America continued its tailspin on Tuesday as shares in the largest US bank tumbled by another 6.4% to their lowest level since March 2009, fuelling fears of a second banking crisis.

As concerns mounted that BoA will need to take huge additional write-offs on bad mortgages, the cost of insuring the group's debt jumped to record levels and investors became increasingly concerned that the financial system could be facing a fresh credit crunch.

BoA's share-price fall followed a 7.9% drop on Monday, which took the stock to less than half its value at the start of the year – a decline that wiped about $65bn from its market capitalisation.

"It does sap investor confidence to see a bank of this stature struggling so mightily," said David Dietze, chief investment strategist at Point View Financial Services in New Jersey.

"It casts a shadow over the entire financial sector and puts a negative spin on the growth picture," added Nick Kalivas, of MF Global Research in Chicago.

Dennis Dick, of Bright Trading in Detroit, said: "Every day it's the same story. BoA keeps leading the charge down on financials and every trader is probably using that as an indicator to trade the rest of the financials too."

Investors continued to offload BoA's shares on fears that its huge exposure to the rapidly declining US housing market and European sovereign debt mean it will need to make much bigger provisions for bad debts. This would force the bank to raise billions of dollars in additional cash to restore its capital ratios, a move that could push the bank's shares considerably lower.

Mark Coffelt, founder of Money Manager Empiric Advisors in Austin, Texas, said: "The stock's a dog. It's on a self-fulfilling downward spiral. I don't know what's going to make it go up. It either has to prove unequivocally that it has enough capital in a worst-case scenario, or it has to raise capital, which will be very dilutive to existing shareholders."

Investor hopes that BoA may raise further capital without issuing new equity were depressed on Monday after Chinese officials said the US bank would keep at least half of its remaining 10% stake in China Construction Bank. Shareholders had expected the bank to sell the whole stake for up to $20bn.

The bank's prospects took a further hit on Tuesday with the release of new data showing that sales of new US homes declined more than expected in July to the lowest level in five years.

Purchases fell by 0.7% to an annual rate of 298,000, indicating that the housing market is struggling to stabilise, according to the Commerce Department. A glut of cheap, second-hand properties arising from the high levels of foreclosure are depressing demand for new homes, making it harder for the housing cycle to turn around.

Foreclosures are likely to remain high for some time as the US economic outlook deteriorates and BoA is particularly susceptible after buying sub-prime mortgage firm Countrywide Financial in 2007, months before these kind of high-risk loans resulted in financial crisis.

Graham Turner, of GFC Economics, said it was "small wonder that stocks such as BoA's are under such pressure," adding that banks are holding on to many of the properties they have repossessed for fear of precipitating further price declines.

"The recent uptick in the unemployment rate increases the risks that early arrears will climb further in Q3. The Lehman Brothers crisis succeeded in pushing 30-day arrears up by 39 basis points over two quarters. A similar increase over the coming six months would push early arrears up to new highs," Turner said.

BoA's shares tumbled as low as $6.28 in morning New York trading, before regaining some ground. Meanwhile, the cost of insuring the bank's debts – through so-called credit default swaps – jumped by 64 basis points to a record 435 basis points, or 4.35%, according to Markit. This means it would cost $435,000 a year for five years to insure $10m of the bank's bonds.

BoA, which last week announced a further 3,500 redundancies, was forced to hold a conference call to appease more than 6,000 analysts and investors this month, in the wake of the group's tumbling share price.

• This article was amended on 25 August 2011 because the original said it would cost $435,000 a year for five years to insure $10bn of the bank's bonds. This has been corrected.